India's economic outlook is optimistic, with numerous global agencies forecasting consistent growth in the coming years. This promising trajectory positions India to become the world's third-largest economy by 2027, surpassing Japan and Germany, as per the brokerage Jefferies India. This ambitious target is driven by the Indian government's strong push towards infrastructure development, a crucial factor for economic expansion.  

Over the past decade, the government has consistently prioritized infrastructure spending, laying a solid foundation for sustained growth. The capital expenditure on infrastructure has increased from Rs 3.4 lakh crore (About $40 billion) in FY19-20 to Rs 11.1 lakh crore (About $133 billion) for FY24-25 (interim budget announcement), a CAGR of 27%. These investments are expected to fuel various industries, improve connectivity, and create a more attractive environment for businesses to flourish.

Role of infrastructure in India’s growth story

A robust infrastructure sector provides a nation access to essential services like clean water, electricity, and transportation. It also generates jobs and fosters a more efficient business environment.  Therefore, prioritising infrastructure development is paramount for India's continued progress. The government launched a comprehensive plan to upgrade and modernise various infrastructure sectors, including roads, railways, airports, and ports. This improved infrastructure will play a critical role in facilitating trade, the movement of goods, and overall economic development.

Further, increased infrastructure spending is crucial for India's ambitious economic goals of becoming a $5 trillion economy in the next few years and a $30 trillion economy by 2047. With many countries pursuing a China+1 diversification strategy, a modernised and expanded Indian infrastructure is essential to attract foreign investors seeking alternatives to China.

Remember, investments in infrastructure have a large multiplier impact on growth and the economy. For every rupee invested in infrastructure and capital expenditure, there is a 2.95 multiplier effect on GDP (gross domestic product).

Development initiatives

In this regard, one key initiative undertaken before the COVID-19 pandemic (in 2019) was the National Infrastructure Pipeline (NIP), with a projected infrastructure investment of around Rs 111 lakh crore (About $1.3 trillion) during FY20-25 to provide high-quality infrastructure across the country. The pandemic then highlighted the existing infrastructure gaps, and the Indian government significantly increased its spending. 

The NIP currently (as of March 28, 2024) has 9641 projects with a total cost of more than Rs 159 lakh crore(About $1.9 trillion) and 2014 projects in different stages of implementation. This plan focuses on areas such as energy, roads, railways, and urban development projects. 

The funding for infrastructure comes from a variety of sources, from government to private sector to multilateral. However, given the quantum of funding involved, the Finance Ministry, in collaboration with infrastructure-related ministries, established the National Monetisation Pipeline (NMP) in 2021. The aggregate NMP potential of the central government's brownfield infrastructure assets has been estimated at Rs 5 lakh crore (About $60 billion) over four years, from FY22 to FY25. While the progress of NMP is off to a slow start, it is expected to drive investments with reforms attracting private investors. 

The positive GDP data reflects the government's focus on capital expenditure. In FY24, all three quarters showed steady GDP growth, with Q3FY24 GDP growth at 8.4%.  Investment activity in the broader economy, as measured by gross fixed capital formation (GFCF), grew 10.5% during October-December this year. It accounts for about a third of India’s GDP (32.4 per cent) in Q3. All this is a clear sign that the economy is in an investment mode.

India's infrastructure development has been a central priority for several years, and this focus continues in the FY25 interim budget. The government has allocated a significant 3.4% of GDP towards sectors such as railways, aviation, and urban transportation projects. This represents a substantial increase from the Rs 3.4 lakh crore (About $40 billion) allocated for capital expenditure in FY19-20, with the current year's budget reaching Rs 11.11 lakh crore (About $133 billion) 

Multiple opportunities: Infrastructure 

Traditionally, infrastructure investment cycles have followed a pattern of 24-36 months, with an inevitable downturn following each period of growth. However, the current downcycle is surpassing its usual duration, likely due to the impact of the COVID-19 pandemic. A report by Phillips Capital Infrastructure, dated March 18, 2024, suggests that India is at the beginning of a long-due upcycle in the infrastructure sector. This upcycle is expected to last at least 2-3 years, marking a positive shift from the previous trend.

That said, private sector investment, a crucial element in sustaining the infrastructure boom in India, remains subdued for a considerable period.  The report added that from 2014-2019, capacity utilisation across industries remained low, with public capex driven by government spending (like through NHAI) as the primary investment source.

However, the past two years have shown promising signs of revival in private sector investment. While this trend remains to be seen as sustainable, as per media reports, analysts expect private capex to improve going ahead.

As such, based on the Phillips Capital report, several key segments of the infrastructure sector reveal a healthy pipeline that should be awarded over the next five years.

●Buildings: Rs 4.5 lk cr (About $54 billion) opportunity driven by ‘Pradhan Mantri Awas Yojna’ (PMAY) under the ‘Housing for All’ scheme; spend on Smart-Cities/AMRUT.

●Roads: Rs 7 lk cr (About $84 billion) opportunity (on a rolling basis) envisaged under the ‘Bharatmala Pariyojana’  Phase 1 (under execution) and Phase 2 (to be awarded).

●Irrigation: Rs 5 lk cr (About $60 billion) opportunity as an extension of the current state expenditure on irrigation.

●Metros: Rs 2.7 lk cr (About $32 billion) opportunity provided by new phases of metros in 14 cities where metro projects are under construction and 12 more cities planning a metro over the next three years.

●Water: The government’s initiative is to provide piped drinking water to every household by 2024. The government is looking to spend Rs 3.5 lk cr (About $42 billion) over the next four years.

 

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This article has been prepared by Kotak Mahindra Asset Management (Singapore) Pte. Ltd. (“KMAMS”).